Brexit likely to adversely affect on Tata Motors owned JLR operations

UK will vote in a crucial referendum on June 23, on whether to remain in the EU, leaving automobile manufacturers concerned as they fear an increase in costs on account of imposition of tariff barriers and job losses in the sector if Britons vote for an exit.Sharmistha Mukherjee | ET Bureau | Updated: June 21, 2016, 10:08 IST

UK will vote in a crucial referendum on June 23, on whether to remain in the EU, leaving automobile manufacturers concerned as they fear an increase in costs on account of imposition of tariff barriers and job losses in the sector if Britons vote for an exit.

While the direct ramifications of a possible exit of UK from EU on JLR's India operations could be limited, the adverse impact on sales in and sourcing from the region is likely to affect profitability of the global firm, say industry experts.

This is likely to indirectly affect Tata Motors' consolidated earnings, given its exposure to JLR's volumes, margins and movements of the British pound.Tata Motors declined to comment on the issue.

In the UK, JLR has joined the ranks of Britain's auto industry body, the Society of Motor Manufacturers and Traders' (SMMT), and cautioned exiting the EU would increase costs and threaten jobs.

Europe accounted for 24 per cent of JLR's sales last fiscal, up from 19 per cent the year before. Together UK and Europe contribute 44 per cent to JLR's volumes. JLR sources 35-40 per cent of components from EU.

Tariff barriers imposed post a possible exit from EU is likely to impact sales, sourcing of components and also movement of workforce for JLR in the region.

A recent report by Roland Berger, a leading global consulting group for manufacturing companies said that 77 per cent of cars produced in UK in 2015 were exported, with 44 per cent exported to EU.

The results of a recent independent survey, announced by SMMT revealed that 88 per cent of large motor industry businesses and 73 per cent of smaller and medium-sized enterprises actively wanted to stay in the EU, and 77 per cent of the industry as a whole agreed Europe was best for business.

This is because even if UK exits EU and inks a free trade agreement, it will still lead to the loss of a third of the industry and 80,000 direct jobs in the intervening two years of uncertainty, it said.

Besides, component sourcing is also likely to be hit by Brexit. According to Roland Berger, of the approximately £11 billion imported automotive parts, 94 per cent came from the European Union, with 27 per cent, the biggest portion, from hightech suppliers in Germany.

"We believe that if the UK votes for an exit, it would be a negative for JLR given the risk of an economic slowdown in the UK and trade tariffs coming into place between the UK and the EU," brokerage CLSA has said in a note dated June 16.

On the positive side, however, if the pound depreciates further on account of Brexit, JLR could benefit from exports. Most of JLR's production is in the UK and as much as 80 per cent of its volumes comprise exports.

Moreover, if trade tariffs become applicable, German luxury cars would become costlier in the UK and JLR could gain share in its home market.